Investor flock towards long-duration debt funds in March, as they sought to benefit from the long-term capital gains tax advantage that was due to expire on 1st April, according to data from the Association of Mutual Funds in India (AMFI).

 

There were net inflows into long-duration and gilt funds of Rs4,674 crore and Rs4,430 crore, respectively, while corporate bond funds received net inflows of Rs15,626 crore. Dynamic bond funds and banking & PSU funds also saw inflows of Rs5,660 crore and Rs6,496 crore, respectively. In contrast, shorter-duration schemes experienced net outflows, with liquid schemes seeing outflows of Rs56,924 crore.

 

 

It is expected that liquid funds will experience outflows at the end of the financial year as companies will need to pay advance tax. However, a significant portion of the outflows from liquid funds were channeled back into duration funds, such as corporate bond, banking & PSU fund, dynamic bond, long-duration, and gilt funds, which saw total inflows of approximately Rs39,000 crore. Target maturity funds/index funds were the largest beneficiary of these inflows, receiving Rs27,000 crore, as investors reallocated their funds in long-duration funds to take advantage of indexation benefits.

 

The higher yield environment in India has created an attractive opportunity for new debt mutual fund investors, as higher yields typically translate into higher returns. By purchasing a debt mutual fund during a rising yield environment, investors can lock in a higher yield than they would have been able to during a time of lower yields. Long-duration funds benefit the most in this situation, as they offer the potential for higher capital gains to investors by locking in higher interest rates and the possibility of future yield falls, which could lead to an increase in bond prices and capital appreciation for long-term investors.

 

Mutual funds launched several target maturity funds in March so that investors could take advantage of the long-term capital gains tax benefit before 1 April. Debt fund investments made before April 1 will continue to enjoy long-term capital gains tax benefits, which means long-term capital gains (investment held for more than three years) will be taxed at 20% with indexation benefit. Gains on investments made after 1 April will be taxed at the investor’s tax slab.

 

Equity schemes, on the other hand, saw net inflows of Rs20,534 crore in March, the highest in 12 months. The March flows were up 30% compared to the previous month. The monthly contribution from systematic investment plans (SIPs) has grown steadily month-on-month and stood at Rs14,276 crore, which is also the highest so far.